Libyan situation drags on, geopolitics trump supply numbers

The uncertainty surrounding these key oil producing nations is resulting in oil prices hovering over the $100/bbl mark which is resulting in a negative impact on global equities as shown in the EMI Global Equity table below. All of the ten bourses in the EMI Index have lost value over the last twenty four hours as the fear of higher oil prices resulting in inflation risk and thus putting the brakes on the global economic recovery is resulting in a risk off trading mentality once again. The Index is now lower by 0.6% on the week as well as the year to date after ending last Friday at breakeven for the year 2011. The London FTSE joined Hong Kong in the losers column as inflation fears are now starting to drive the developed world bourses.

Since early 2009 the equity markets have been the main catalyst driving oil prices higher as the perception trade took hold. The perception that rising equity prices (which is correlated to rising GDP which is correlated to rising oil consumption) will result in an improvement in the supply, demand and inventory situation and thus a reason to buy oil and other commodities for that matter. Now that geopolitics is the main driver the perception trade is still in place but this time oil prices are not the result but the cause of the market moves. Surging oil prices are now perceived to have a negative impact on the global economy and thus a negative driver for equity prices. The massive price surge in 2008 is still clearly in the minds of investor, traders and consumers and each time the price of oil ventures above the $100/bbl mark all of the markets get a bit spooked with more and more players looking to now reduce their risk exposure in all asset classes.

Late yesterday afternoon the API released their latest inventory assessment. The API report was surprisingly bullish. The API reported across the board declines in oil stocks at a time when the market was starting to like the fact that a huge surplus exists in the US in light of the turmoil in the Middle East and North Africa. The API reported a crude oil inventory draw of about 1.1 million barrels as refinery utilization rates increased by 0.3% to 78.4% of capacity. The API also reported a decline in crude oil imports. They also showed a huge draw in gasoline stocks of about 4.9 million barrels while distillate fuel stocks declined by about 1.4 million. The results of the API report are summarized in the following table. So far the reaction to the API report has been mildly bullish as prices have increased in overnight trading but the vast majority of the gain in oil prices is more related to the turmoil in Libya. If today’s EIA report is in sync with the API report I would view it as modestly bullish as everything was outside the market's projections. The overall oil decline is definitely in the right direction in reducing the overhang that still exists in the US…especially in the mid-west region however, it is coming at a time when the world is in the midst of supply disruption price shock.

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